About the company
Republic Services Inc. (NYSE:RSG) is one of the leading companies in the garbage collection and waste disposal sector. So far, RSG has outperformed the S&P 500 ETF (SPY) in 2024 by a healthy margin of 22.7% to 14.4%. Even more impressive, Republic has made significantly more profit than SPY over the past year, 36.7% to 21.3%. RSG typically trades at a premium due to its consistent and predictable earnings and strong pricing power. Additionally, Republic is a serial buyer, spending much of its excess capital on acquisitions to expand. The company appears slightly overvalued right now, but companies like this don’t often come “for sale,” so I’ll be keeping a close eye on it for any price weakness.
Financial indicators
Republic Services’ revenue has been small dip due to Covid in 2020. RSG saw a solid increase in revenue of more than 11% from 2020 to 2021 and an even bigger jump of almost 20% from 2021 to 2022. A significant portion of this almost 20% increase is due to their Acquisition of US Ecology. Finally, the company posted another solid increase of nearly 11% in 2023. Over the past five years, RSG has grown its revenue at a compound annual growth rate of nearly 10%, thanks to the company’s acquisitions, the need for its services, and its strong pricing power. Management expects sales in the 2024 financial year It is expected to be between $16.075 billion and $16.125 billion, an increase of 7.5% over 2023.
Except for 2020, RSG’s earnings per share have also been growing. Since 2019, the company’s earnings per share have increased by more than 13%, with the highest increase in 2021 at 33%. This is partly due to RSG’s earnings per share declining by almost 10% from 2019 to 2020, followed by an impressive increase. In addition, management has forecast earnings per share in the range of $6.10 to $6.15 for 2024, which represents an increase of about 11.5%.
The last financial metric I want to review is the company’s operating margin, which has remained stable overall except for some minor fluctuations. Garbage collection is obviously a pretty consistent business and something that all consumers need. Over the past five years, Republic Services has gone from a low of 16.83% to a high of just over 18.5%. A company’s ability to at least maintain its operating margin is essential because it shows its ability to control variable costs.
The dividend
Republic Services has been paying dividends for more than 20 years and is on track to achieve “dividend champion” status in the next few years. According to Seeking Alpha, RSG currently yields about 1.15%, about 40 basis points below the industry median. In addition, RSG has been very consistent with its dividend growth. Dividend growth rates for the past 3, 5, and 10 years have all been above 7%, earning the company an “A” rating from SA’s quantitative system. Finally, the company’s payout ratio has dropped from nearly 50% in 2019 to nearly 35% in the last fiscal year, leaving plenty of room for future dividend growth.
Additionally, the company has been able to significantly increase its free cash flow over the past few years, which has allowed it to maintain and grow its dividend. As you can see from the chart below, the company has grown its FCF by about 14% since 2021. Additionally, management expects adjusted free cash flow in the range of $2.15 billion to $2.17 billion in 2024, resulting in a potential increase of about 9%. RSG’s ability to maintain consistent and increasing free cash flow through various channels, such as its ability to retain customers (94%), route concentration, and overall customer satisfaction, should allow the company to continue to pay a healthy, safe, and growing dividend.
Comparing RSG’s yield to its closest competitors, it’s almost exactly in the middle. As mentioned, RSG currently yields about 1.15%, while Waste Management’s (WM) yield is just over 1.4% and Waste Connections’ (WCN) yield is 0.63% as of 8/14/24. Although Republic lags Waste Management in yield, its stock price has increased about 19% annually over the past five years, while WM and WCN have each returned about 13.7%.
Evaluation
To determine if a stock may be overvalued or undervalued, I use two methods. The first is the dividend yield theory, which is based on the assumption that the company is undervalued if the current yield is higher than the historical yield, and vice versa if the yield is lower. The other method is more common and is based on the price-to-earnings ratio, which is calculated by dividing the current price by the trailing twelve months’ earnings per share. While neither method is an exact science, both are a quick way to determine if a company is worth further investigation.
As you can see from the chart below, after the peak of the Covid pandemic, RSG’s yield was around 1.9%, a chart high, before falling quite quickly in the second quarter of 2021. After that decline, the company’s yield remained very close to its four-year average, only occasionally fluctuating slightly below and above it. It is only in the last nine months that the company’s yield has fallen to a chart low, where it sits today. According to DYT, the company is currently quite overvalued, and I will have to wait for a pullback before acquiring a position.
The price-to-earnings chart below fluctuates quite a bit, from a low of nearly 25 to a high of just over 34. In the first year of the chart, the company’s P/E was below its four-year average of 29.3. In late 2021, it shot up to nearly 34 and mostly stayed above its average until it started declining for a brief period in late 2022. In the third quarter of 2023, the P/E rose back above its four-year average and has continued to rise so far in 2024. As mentioned above, RSG’s four-year average P/E is just above 29. Combining that with management’s EPS forecast of $6.10 (low), we arrive at a rough price of $177, about 15% below current levels. Comparing this approximation with the DYT chart, both agree that the stock is most likely overvalued and that investors should wait until a better entry point presents itself.
Risks
Although Republic operates in a very predictable industry, it is not without risks. The biggest risk I see with RSG is at least in part the company’s primary growth strategy, which relies on acquisitions. To date, Republic Services has been successful in acquiring companies and at a fair price. However, many acquisitions do not work out for one reason or another. Either the companies do not integrate well or the acquiring company paid an unnecessary premium. RSG appears to be doing its due diligence and not overpaying, but a growth strategy like this should be monitored in case the company becomes too reckless with its spending.
Another risk for Republic, to a much lesser extent, is fluctuations in commodity prices. RSG is able to sell recycled products at market prices, which can impact earnings, albeit only to a small extent. However, on the company’s Q2 2024 earnings call, management reported that commodity prices were at $173 per ton, compared to $119 per ton last year. I realize that selling tons of recycled products is not their bread and butter, but any drastic drop in commodity prices could easily depress their earnings.
Final thoughts
Republic Services operates in a very reliable market and has shown the ability to grow revenue and earnings per share at a healthy pace, which is what all shareholders expect from their investments. RSG has a safe and growing dividend with average increases of over 7% over the past 10 years and seems to be on track to become a dividend champion before the end of this decade. The main risk to this company is in the hands of management. It should remain disciplined in its acquisitions and avoid excessive spending. Despite all this, I would love to add this company to my portfolio, but at its current level, it is too expensive and offers no margin of safety. Therefore, I rate Republic Services a Hold and hope for a better entry point in the near future.